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Chapter 12: Q16RQ (page 655)
What are the two categories of liabilities reported on the balance sheet? Provide
examples of each.
Liabilities are classified into current and long-term liabilities.
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How does compound interest differ from simple interest?
Reporting liabilities
At December 31, MediStat Precision Instruments owes \(52,000 on Accounts
Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat
also has \)300,000 of Bonds Payable that were issued at face value that require
payment of a \(35,000 installment next year and the remainder in later years. The
bonds payable require an annual interest payment of \)4,000, and MediStat still
owes this interest for the current year. Report MediStat’s liabilities on its classified
balance sheet on December 31, 2018.
Journalizing bond transactions
Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on
January 1, 2018. Interest is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest on July 1, 2018.
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues
\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The
present value of the bonds at issuance is \)365,732.
Requirements
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
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